Economic Theory for the Socially Perplexed

Why is getting along with other people so complicated? Shows like Seinfeld and Curb Your Enthusiasm have explored this question with hilarious results. But last week Rick Harbaugh of Indiana University came to speak at GMU, and convinced me that economic theory has at least as much insight to offer the socially perplexed.

Harbaugh is a technically sophisticated signaling theorist, but his models begin with Tolstoyan insight into the human condition. Case in point: the paper Harbaugh presented was "False Modesty: When Disclosing Good News Looks Bad" (co-authored with Ted To). Other signaling theorists have assumed that if you can brag about yourself, you will. But in fact, inappropriate (but TRUE) bragging often lowers one's social standing:

If you have good news should you disclose it? The standard answer is yes because otherwise people will skeptically assume that you have nothing favorable to report... [T]alented students are often reluctant to brag about their grades, highly educated people do not always list their degrees, donors sometimes make anonymous donations, overachievers often engage in understatement, advertisers of high quality products frequently use a “soft sell” approach, and people accused of an offense sometimes withhold mitigating information rather than “protest too much” or “make excuses.”

The paper then explains with great clarity what assumptions you need to make this story fly. It's beautiful.

Most risky decisions involve both skill and chance. Success is therefore doubly fortunate in that it brings both material gain and an enhanced reputation for skill, while failure is doubly unfortunate... For instance, the manager of a successful project wins the confidence of superiors to oversee more projects, while the manager of a failed project is viewed as incompetent and loses future opportunities... [A]n investor who picks a successful stock enjoys the esteem of friends and family, while an investor who chooses poorly looks like a foolish loser.

Bottom line: Harbaugh's the first high-level theorist in years that made me see the social world in a new light. Unless economic theorists want Levitt-style empiricists to confine them to an irrelevant ghetto of economics, they're going to need to read between the lines of Harbaugh's research program and learn his underlying moral: Theorists should draw their inspiration from life, not from "the literature."

These remind me of the perennial problem in businesses of why the most capable people often get overlooked for promotions while those good at self-promotion, but less capable, advance. It seems that the senders mistakenly assume that management, the receivers, have information on the performance of people under them. So the senders don’t signal their achievements out of fear of bragging. But as my organizational behavior prof said, management often doesn’t know who does what because they’re paying attention to signals from their own bosses and trying to get ahead. Also, it takes a lot of work to determine who is doing well and who isn’t. So management often accepts signals from below at face value and assume that those who don’t signal aren’t doing anything. If you want to get ahead, especially in large corporations, learn to signal appropriately.

Roger M: That's a good point. If inefficient models get weeded out, you have to wonder: why hasn't it gotten to the point that managers systematically discount the value of employees who appear to be attempting to signal at the expense of "real" work? And in the general case, why does advertising work? In the same way, why don't consumers systematically discount flashy, expensive advertising to the point that it's not effective?

Silas Barta: It could be that consumer do indeed discount advertising signals, but still buy more product. Suppose advertising consists of two components: actual information about new products and services + hype. How much "hype" to put in the advertisement could be the signalling mechanism, and consumers might already have a hunch about how much different firms hype. So it fits into the framework (maybe).

Firms with good products might face a dilemma about how much to hype; if they are honest and signal a great product value, they might be discounted by consumers as over-hypers with mediocre products. There could be an equilibrium where consumers generally figure out how good products are by using their preconceptions and looking at how much hype the advertisement has.

If consumers can indeed cut through the hype and get the true values, advertising still has an actual informative component and could work to get more consumers buying the product. There's no contradiction there. Of course, it might be that the equilibrium solution is for every advertisement to have maximum hype and for consumers to always be in the dark about product quality.

There's also a lot of self-referential, we-aren't-serious, mock-pomposity (that's intended to disarm) built into a lot of advertising these days. And one of the things you see a bunch in ads is a strategy meant for youngsters who are supposed to be burned out on marketing. The ad won't have much to do with the product. It'll just be an experience in its own right. Then there'll be a kind of blip, and you'll pick up that someone sponsored this cool experience. We're too cool to advertise to sharp cool kids like you, is kinda the message. Presumably it's effective. Reminds me of something you see much of these days in graphics and commercial arts: words that don't need (to be) put in paragraphs or brackets. Which kinda suggests someone making indirect cracks about what he himself is saying -- very Dave Eggers. I find it all boring, frantic, and appalling, but there it is, and presumably some of it's reasonably effective ...

Sorry, I just can't get past the gratuitous "her" that springs up in the linked essays when the gender of an antecedent isn't clear. Talk about self-conscious signalling! And the signal - I'm conscientiously compensating for the historical oppression of womyn - is just propagating a lie. I would have thought Harbaugh was too cool for that.

There's a lot of myths out there about advertising. I read a book by the head of marketing for Coalgate Polmolive a few years ago in which he wrote that 80% of all advertising is wasted. It's very difficult to do good advertising that gets people's attention and sells a product. When ads fail, ad agencies fall back on the excuse that it takes months or years of advertising to build a brand. I've read about one company that can test ads and predict with good accuracy the amount of sales that an add will generate, but few agencies follow that company's scientific approach. The Journal of Advertising has a lot of good articles that cut through the cloud of myths and would help agencies create good ads if they would use them.

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